Can I still reach financial independence? What’s up with the markets? These are questions we all struggle with. It is a function of age. It is a function of debt (read mortgage), and it is also a function of desire. Desire means the propensity to save for your future.
Having said all that, it is human nature to focus on the short term vs. the long term. We view short term as one year; long term being five years.
The last year has reminded us of the pain in the financial markets in the short term. It is easier for those of us who have seen the down markets before in the longer term. Historical data substantiates the upside, it proves the positive position of the markets; it is in no way less painful in the short term.
We can truly bore you with facts that suggest next year will be better for the equity markets. Unemployment is still down; interest rates are predicted to peak shortly and then revert to a downward trend. Reduced inflation in the next year will help the average household. Prices will begin to normalize as people stop spending, and when demand drops, prices moderate.
Some interesting historical comparisons of the S&P 500. This is the large, broad-based US index which tracks the performance of 500 companies. We are looking at it as a proxy for North American markets overall.
Its performance in the months of October and November is very interesting; its total return was in excess of 10%. In fact, each month had a return of over 5%. This is very rare!!! What does history suggest about performance for the next 12 and 24 months?
Since 1940…
A two-month total aggregate return of greater than 10% has occurred 25 times. After that:
- The average return over next 12 months was 21%.
- The average return over 24 months was 34%.
- History suggests targets for the S&P 500 of 4800 for 12 months and 5400 for 24 months out. We are currently at 3900.
Let’s look at the very rare occurrence of successive months with plus 5% returns, as we experienced in October and November. Since 1940 there have been only seven occurrences.
- The next 12 months average return 31%.
- The 24 months average return was 46%.
- This suggests a 12-month target of 5200 on the S&P and suggests a 24-month target of 5800.
Summarizing
- Short-term rallies within a negative bear market typically do not produce two successive returns as strong as October and November of this year. Typically, these indicate a positive (bull) market.
- Yes, history does not predict the future, but patterns do repeat.
Source: Dr. Jim Thorne, Chief Market Strategist Wellington-Altus Private Wealth, Dec. 3, 2022
While we recognize that the sentiment is very negative; in fact, that negativity can itself be a precursor or signal that better is to come. We recommend continuing to save for your future, reducing your debt, and staying the course with your investments. Your future self will thank you!
Photo by Grant McIver on Unsplash
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